Transocean (NYSE:RIG) issued a press release stating that it has agreed to acquire Transocean Partners (NYSE:RIGP) in an all-stock transaction. Each RIGP unitholders will be entitled to 1.1427 of RIG stock. RIG plans to issue 22.7 million new shares to distribute to RIGP unitholders upon the completion of the transaction.
No matter how you slice it this is a bad deal for RIGP unitholders and we will be voting against the proposal with our units. At the moment, RIG is trading at $10.22 per share, whereas RIGP is at $11.85. Based on the proposal, RIGP unitholders will also receive a distribution in the amount of $0.3625 per unit in addition to RIG shares upon completion.
RIGP had $155 in cash at the end of Q1 and will generate an additional $70-75 million during Q2. The company paid $45 million to RIG as per 10-Q, which is cash that belonged to non-controlling interest. In addition, the company paid out $25 in Q2 distributions. RIGP will exit Q2 with close to $170 million in cash and $50-60 million in working capital. That's $3 per outstanding unit (both common and subordinated).
The remaining contract backlog at the end of Q1 was $1.45 billion. Revenue in Q2 was close to $150-155 million resulting in Q2 contract backlog of $1.29 billion. Given current operating margins, RIGP is expected to generate close to $600 million in cash from Q3 2016 through the end of 2018 when another contract rolls over. Half of that amount belongs to RIGP unitholders and equals to $4.5 per unit.
Therefore, through the end of 2018, RIGP is worth $7.5 per unit simply based on the current contracts and cash. If we conservatively assume that rigs themselves are worth $230 million on average, that would add another $5 per unit, resulting in total value of $12.5 per unit. This is liquidation value of the company and does not take into account the potential of the industry to return to normalcy by the end of the decade.
The parent company is making a well-calculated move as it makes no sense for RIG to payout such extraordinary amount of cash to controlling interest, i.e. non-Member unitholders. In order to exercise its limited call right, RIG must own at least 80% of all outstanding common units. If it doesn't get the consent of non-Member unitholders to the tune of 9.9 million units the transaction has no chance to go through. We feel the offer severely undervalues the company and will vote against the proposal.
Disclosure: I am/we are long RIGP, RIG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.